Champagne corks were popping recently at EMI's corporate headquarters in Hanover Square in London. One of its most important acts, The Chemical Brothers, had gone straight in at number one in the album charts.

But more significantly for its long-term financial health, Britain and Ireland's biggest record company had just signed a deal with Liquid Audio (www.liquidaudio.com), the American software supplier, to start encoding its back catalogue to make it available on the Web. Although the deal is being touted as the future of music, the issue of downloadable music threatens the structure of an industry with a turnover of nearly £3 billion in Britain alone.

The news preceded the announcement that the big five record companies - EMI, Sony, Polygram, Universal and Warner - along with major consumer electronics and IT companies, had signed up to the Secure Digital Music Initiative (SDMI), the music industry's attempt to stop the rising tide of Internet piracy.

The SDMI is an agreement by the music, consumer electronics and information technology industries to adopt specifications for portable devices of digital music, like the Rio portable MP3 player. It is clear that hardware manufacturers intend to embed a "screening" device within their portable players that will filter out pirated MP3s. Whether the SDMI will work is another matter. As games manufacturers know only too well, to develop encryption software and screening devices is one thing, to get them to work is another.

At the moment anyone can convert their CDs into MP3 files, the compressed sound file that can be downloaded in minutes. Although it is technically illegal to do so, there is little to stop users emailing MP3s to their friends or posting them on the Net.

Many sites, some legal, some not, already exist. Diamond Multimedia, which produces the Rio, has got itself into trouble with the music industry which sees it as being a facilitator of pirate MP3 files. The British Phonographic Industry (BPI) even backed legislation to make the Rio illegal in Britain at one point.

Diamond has backed down and agreed to make its next generation of players SDMI-compatible. But the problem does not stop there.

Mr Andy Strickland, editor of dotmusic (www.dotmusic.com), a leading Web-based music magazine, thinks that the SDMI deal is not without its problems. "There will be plenty of hackers trying to work out the security features," he says.

"There is a clandestine appeal to the appropriation of MP3s. The industry has been very paranoid up until now about Internet piracy and, while I welcome any attempt to protect musicians' rights, I can't see people who have already bought a Rio upgrading to the new standard. I think a lot of piracy will remain."

One by-product of the SDMI deal, if it is accepted as standard, might mean that the exorbitant prices that British consumers pay for music might have to come down. Consumers will be unwilling to pay the higher price for MP3s if they can, say, buy music from US or European sites. At best, the SDMI agreement is a sign that the music industry is belatedly accepting that the future of music lies with the digital download, and less in "physical" formats like CD, DVD and mini disc.

At worst, it is being seen as a white elephant that will fail to protect copyright from hackers. Some industry observers think that the real problem with SDMI is that it is too little, too late. The view is that the record industry took too long to agree on a standard. The question is: will consumers be prepared to buy SDMI while free MP3 files can be found on the Web?